Intermediate: Fixed and flexible budgets and preparation of sales budget based on principal/limiting budget factors

(a) Define the term 'principal budget factor'. Say why the principal budget factor is important in the planning process.

(3 marks)

(b) What are the differences between a fixed budget and a flexible budget? In what ways are fixed budgets and flexible budgets useful for planning and control? (7 marks)

(c) In its budgets for the period ahead, a company is considering two possible sales forecasts for its three products:

Variable costs per unit are expected to be the same at the different levels of possible sales. The variable costs per unit are as follows:

Fixed overheads are expected to total £150 000. These are expected to be unaffected by the possible changes in activity which are being considered .
Due to recent high labour turnover and problems of recruitment, direct labour wtll be restricted to a max1mum of £135 000 in the period. It can be assumed that all labour is of the same grade and is freely transferable between products. Other resources are expected to be generally available.
Required :
Take each of the possible sates forecasts tn tum .
(i) Say what the principal budget factor is for each of the forecasts.
(fi) For each forecast, calculate the sales budget that you would recommend to maximize profits.
(iii) What profit would you expect from each sales budget?
In order to answer these questions you must assume that the three products must be sold either all at the higher prices or all at the lower prices.

Transcribed Image Text:

Product A Product B Product C i) Sales units 22000 40000 6000 Selling price per unit 10.00 6.00 7.50 (ii) Sales units 30 000 50 000 7000 Selling price per unit 9.00 5.70 7.10